CE -482 Construction Management

Practice Exercises for Engineering Economics Module

Part-A: Time Value of Money

2. If you invest Rs. 10,000 now in a business venture that promises to return Rs. 14,641, how
soon must you receive the Rs. 14,641 in order to make at least a 10% per year return
compounded annually on your investment?

3. Your uncle has agreed to make five Rs. 700 per year deposits into a savings account for
you starting now. You have in turn agreed not to withdraw any money until the end of year 9,
at which time you plan to remove Rs. 3000 from the account. Further, you plan to withdraw
the remaining amount in 3 equal year-end instalments after the initial withdrawal. Diagram
the cash flows for your uncle and for yourself. Interest rate is 8%.

4. If you invest Rs. 4100 now and receive Rs. 7500 five years from now, what is the rate of
return on your investment?

5. How much money would be accumulated in 6 years if a person deposited Rs. 500 now and
the deposits increase by Rs. 50 per year for the next 6 years? Assume ‘i’ is 16% per year and
draw the cash-flow diagram.

6. A company is planning to make 2 equal deposits such that 10 years from now, the
company will have Rs. 49,000 to replace a small machine. If the first deposit is to be made 2
years from now and the second is to be made 8 years from now, how much must be deposited
each time if the interest rate is 15% per year?

7. If a college student can save Rs. 600 per year from her part-time job, how long will it take
her to save enough money to purchase a Rs. 2,500 bicycle if she can get 10% per year interest
on her money?

8. For the cash flow below, calculate (a) the equivalent uniform annual cost in years 1
through 5 and (b) the present worth of the cash flow. Assume that the interest rate is 12% per
year.

9. A businessman purchased an existing building and found that the ceiling was poorly
insulated. He estimated that with 6 inches of foam insulation, he could cut the heating bill by
Rs. 25 per month and the air-conditioning cost by Rs. 20 per month. Assuming that the winter
season is the first 6 months of the year and the summer season is the next 6 months, how
much can he afford to spend on insulation if he expects to keep the building for only 2 years?
i= 1.5% per month?

10. The details of the feasibility report of a project are as shown below. Check
the feasibility of the project based on present worth method, using i = 20%.
Initial outlay = Rs. 50,00,000
Life of the project = 20 years.
Annual equivalent revenue = Rs. 15,00,000
Modernizing cost at the end of the 10th year = Rs. 20,00,000
Salvage value at the end of project life = Rs. 5,00,000.

11. Derive the formulae for the following interest rate factors as functions of interest rate,
number of compounding periods and cashflows.

i) (P/F, i, n)

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ii) (F/P, i, n)
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iii) (A/P, i, n)
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iv) (P/G, i, n)
Part B – Comparison of Alternatives
1. You are planning to purchase an equipment that costs Rs. 30,000 and is expected to last 12
years with a Rs. 3,000 salvage value. The annual operating expenses are expected to be Rs.
9,000 for the first 4 years but owing to decreased use, the operating costs will decrease by Rs.
400 per year for the next 8 years. Alternatively you can purchase a highly automated machine
at a cost of Rs. 58,000. This machine will last only 6 years because of its high technology and
delicate design, and its salvage value will be Rs. 15,000. Because it is so automated, its
operating cost will be only Rs. 4,000 per year. If the company’s minimum attractive rate of
return is 20% per year, which machine should be selected on the basis of a present-worth
analysis?

2. BMC has expected the first cost of a new city-owned amusement park to be Rs. 35,000.
They expect to improve the park by adding new rides every year for the next 5 years at a cost
of Rs. 6,000 per year. Annual operating costs are expected to be Rs. 12,000 the first year, and
these will increase by Rs. 2000 per year until year 5. After that time, the operating expenses
will remain at Rs. 20,000 per year. BMC expects to receive Rs. 11,000 in profits the first
year, Rs. 14,000 the second, and amounts increasing by Rs. 3,000 per year until year 8, after
which the net profit will remain the same. Calculate the capitalized cost of the park, if the
interest rate is 6% per year.

3. Compare the alternatives shown below on the basis of EUAW, using a compounded
interest rate of 15%.

4. You want to construct a dam on a river. Six sites have been suggested. The construction
costs and average annual benefits (income) for each dam is given below. If a MARR of 6% is
required, and dam life is long enough to be considered infinite for analysis purposes, which
location will you select?
Application problems based on the concepts discussed in class

A big oil company is contemplating of adding new well to its existing wells. It will cost $4
million to add the new well. The company estimates that there would be an increase in
revenues for the first few years and then there will be a dip later due to various reasons
including the increased costs of recovering oil from the well. The company has to borrow in
year 6, 7 and 8 just to close the well safely and no major catastrophe occurs. The company
has no other way but to recover the oil till it is exhausted and the well is closed safely in 8
years once it adds this new well. The cash flow diagram for the new well is given as follows.

Find if the oil company has to start this well using Rate of Return Analysis, if MARR for the
company is 12%. The company usually borrows money at 8% and invests at 15%.
6. The following table gives the operation cost, maintenance cost and salvage value at the end
of every year of a machine whose purchase value is Rs. 20,000. Find the economic life of the
machine assuming interest rate, i = 15%.
7. The failure rates of transistors in a computer are summarized in the following table.

The cost of replacing an individual failed transistor is Rs. 8. If all the transistors are replaced
simultaneously, it would cost Rs. 4 per transistor. Any one of the following two options can
be followed to replace the transistors:
(a) Replace the transistors individually when they fail (individual replacement policy).
(b) Replace all the transistors simultaneously at fixed intervals and replace the individual
transistors as they fail in service during the fixed interval (Group replacement policy).

Find out which is the optimal replacement policy, i.e. the individual replacement policy or the
group replacement policy. If the group replacement policy is optimal, then find at what equal
intervals should all the transistors be replaced? Please state your assumptions clearly.